Survey gives insight into Covid-19 impact on Hong Kong joint ventures

Out-Law News | 21 Dec 2020 | 10:08 am | 4 min. read

A shortage of labour and disruption to supply chains have been the biggest contributors to delays and increased costs suffered by joint ventures (JVs) in Hong Kong's construction sector during the coronavirus crisis, according to the results from a targeted survey.

International law firm Pinsent Masons, the law firm behind Out-Law, asked senior managers and general counsel at some of the largest construction contractors in Hong Kong a series of questions to find out how well JV arrangements they had entered into have stood up to the challenges posed by the Covid-19, and also to identify whether there are lessons that might be learned from the pandemic to help future-proof JVs against similar risks in the future.

Of the 27 respondents, 80% said they had experienced delays, and 70% said they were facing increased costs of complying with contractual obligations, as a consequence of Covid-19. Most respondents identified material or supply chain disruptions (65%) and/or a shortage of labour (60%) as the causes of those delays or increased costs.

Future-proofing JVs?

The survey also found that, in many cases, JV contracts in operation in Hong Kong did not contain specific clauses for dealing with the effects arising from Covid-19 or more generally with a 'force majeure' event.

Ang Bernard

Bernard Ang

Partner

Those findings were not surprising since many standard contracts underpinning JV arrangements used in the city do not contain force majeure clauses, let alone Covid-19 clauses

Of the 16 respondents who said their JV arrangement had been adversely affected by labour shortages, 13 said the contracts do not have specific clauses to allocate the risk of neutral events such as Covid-19 between JV partners, while 70% of all respondents said there is no force majeure clause at all in their JV arrangement.

Hong Kong-based Bernard Ang, who specialises in infrastructure project contracts at Pinsent Masons, said: "Those findings were not surprising since many standard contracts underpinning JV arrangements used in the city do not contain force majeure clauses, let alone Covid-19 clauses."

"It is significant, however, that approximately three quarters of respondents who said they have been adversely impacted by labour or material shortages during the pandemic, feel that specific provision should be made in future JV contracts for Covid-19 or similar pandemic risk, and likewise significant that 74% of respondents whose JV arrangements are currently without a force majeure clause believe that should change in future," he said.

Sharing risks

Some respondents to the survey said they believe the risk of Covid-19-related disruption and increased cost could be allocated based on the existing share of parties in the JV arrangement, while others said those risks could be adequately addressed by Covid-19 or force majeure clauses in the main contract between the employer and JV.

Bernard noted, however, that those approaches may not be suitable for all JV arrangements.

He said: "In relation to the idea of allocating risk based on JV participation share, this may be appropriate in the case of integrated JVs since parties agreed to share all losses in such proportion. However, partners to a non-integrated JV do not share loss, meaning an affected partner, particularly those with offshore labour or material supply, would have to solely bear any such risks themselves, unless they negotiated their own bespoke force majeure clause."

As regards relying on the main contract force majeure clauses, Bernard cautioned: "Those clauses only govern the relationship between the employer and the JV as a whole, not between the JV partners themselves. The question is whether JV parties should also import those clauses into the JV arrangement, and adapt them accordingly, for example to allow a JV partner exposed to foreign impacted supplies to substitute for local supplies." 

“A majority would seem to welcome such an adapted clause in the future," Bernard said.

There were, however, mixed views on whether it is fair to share time-related costs, such as costs to maintain performance bonds or insurances, between JV partners in the event only one JV party's planned works are substantially delayed, with just 51% of respondents in favour of sharing costs in such circumstances and 44% of the view that the party suffering delay should bear the resultant costs.

Lewis Dean

Dr. Dean Lewis

Partner, Co-head of International Arbitration

Whatever approach is preferred on the allocation of liability for loss, this should be stipulated clearly in the JV contract so as to avoid any dispute or uncertainty

Similarly, only 52% of those surveyed said uncompensated costs arising from a force majeure event under the main contract should be allocated across JV parties, while 41% preferred that the loss should lie where it falls.

"Whatever approach is preferred on the allocation of liability for loss, this should be stipulated clearly in the JV contract so as to avoid any dispute or uncertainty," stressed Dr Dean Lewis, who specialises in international arbitration in the infrastructure and energy sectors at Pinsent Masons.

Method of risk-sharing

A number of potential solutions to sharing force majeure risks in JV arrangements were also highlighted in the survey responses. More than half of respondents (52%) said they believe that allocating the risks in direct proportionate to the share each party has in a JV arrangement is fair, while 30% of respondents said they believe expenses stemming from force majeure events should be treated as common expenses. Nearly a fifth of respondents (19%) said they would be open to adjusting participation shares to reflect any inequities caused by Covid-19, while 15% favoured the JV board determining the allocation of force majeure risk between JV parties.

Termination

A majority of respondents (almost 60%) said they want JV contracts in future to include termination clauses that could be triggered in the event of a force majeure event or Covid-19-related event causes prolonged suspension of the performance of the contract. However, those opposing this view believe including termination rights of this kind in JV contracts would potentially be in breach of the main contract with the employer. Currently, there are no JV contracts in the Hong Kong construction sector that allow termination or exclusion of a party due to force majeure or Covid-induced prolonged suspension, according to the survey findings.

Disputes

Lewis said he was encouraged that just one survey respondent had said they had encountered disputes arising from the impact of Covid-19 on construction JVs in Hong Kong so far. However, he said it is likely that more disputes will arise the longer the pandemic continues.

Lewis was further encouraged by the fact almost half of those surveyed (48%) said they believe collaboration and consultation with JV partners will be more effective in resolving JV disputes arising from Covid-19. There were no firm conclusions, however, on the form of the dispute resolution process – whilst six favoured a more structured, multi-tiered dispute resolution mechanism, eight respondents preferred a less structured dispute resolution process. Nearly a third (30%) of respondents said they would like ability to appoint an expert to determine the outcome of a dispute.

Planning ahead

Lewis said: "Covid-19 has had a massive impact on the construction industry and perhaps it is a good time for contractors to reflect on their existing JV structures, whether they are adequately equipped to deal with these unexpected circumstances and what could be done to better structure the JV arrangements to minimise these uncertainties."

A copy of the full survey report is available by contacting Bernard Ang of Pinsent Masons at [email protected]